Shutting Down the Economy? Impact of US Government Shutdown

Dana Peterson: Welcome to C-Suite Perspectives, a signature series by the conference board. I'm Dana Peterson, center Leader of the Economy Strategy and Finance Center at the conference board and guest host of today's episode.

Joining me today is Yelena Shulyatyeva, a senior US economist for the Conference Board Economy Strategy and Finance Center. In today's conversation, we'll discuss the economic implications of an impending US government shutdown. Welcome, Yelena. Thank you. So Yelena, what is a government shutdown?

Yelena Shulyatyeva: So yeah, let's start with the basics and thanks for having me here, Dana.

A government shutdown happens when the US Federal Government essentially runs out of legal authority to spend money because congress hasn't passed. An appropriation bill or appropriation bills, or a stop gap funding measure also known as continuing resolution. So usually the fis, the federal fiscal year begins on October 1st.

So if no funding agreement is in place, many agencies are simply required to seize non-essential operation. The most recent shutdown happened at the end of. 2018, beginning of 2019 when the government was shut down for 35 days, which was essentially the longest in US history.

Dana Peterson: What's the difference between a partial and a full government shutdown?

Yelena Shulyatyeva: A full usually means like the whole government shuts down where, whereas partial means that some agencies are still operating. It's as simple as that.

Dana Peterson: So which agencies would still be open? Will people get their social security checks if this lasts for long?

Yelena Shulyatyeva: Yeah. Usually most essential services are open.

So there are some essential services and there are some non-essential ones. So like in case of a government shutdown. Usually what happens is that essential services are still present. So we still have military the still, so social security checks coming and postal services is still operating.

Whereas, things like national parks for example could be closed or the governments will stop or delay releasing any permits, for example.

Dana Peterson: I'm just thinking about data. So would the Bureau of Labor Statistics or the Bureau of Economic Analysis be open to publish data or to collect data?

No.

Yelena Shulyatyeva: And here the trick is that it depends on what they will decide to keep open. So sometimes the Bureau of Labor Statistics could remain open. And that really matters because the employment, the very important payrolls report that is so essential for the markets and the Fed. Could still be released, but it looks like we may actually have a delay in getting that essential report for the months of September this time around if the government shuts down.

So some other agencies like bureau of economic Analysis and the Census Bureau, they most likely will shut down and they will not be releasing any data. It really matters how long you shut down the government for. So if it's just a couple of days or a week even then probably the dis the disruptions will not be that big.

That could be a delay in releasing some data, but they will be released for the most part. People could have difficulties collecting the data because if. Those data collectors that call you or ask you to submit an electronic re a response to one of the government surveys they're not working.

So how are you going to collect the data? That's one part. Then you have to put this, all the stuff together and issue that report. But if you don't have any workers doing that, how are you going to do that? So it's, it really matters how long the government remains shut down for the economic data to be released.

So if it goes beyond a month like it was the case in the past, you could see a significant delay in release of data, which then will be released. Could be released in batches like a couple of months altogether with a significant delay. This is a huge problem for the markets, for policy makers, for economists.

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Dana Peterson: it. So you mentioned the patent office would be closed. I would imagine that, a lot of, permit offices would also be shut down. Which sectors would be harmed the most by a government shutdown?

Yelena Shulyatyeva: Just to step back a little bit the first thing that is affected is usually in terms of GDP that would be non-defense government spending and investment.

So the contractors who work for the government they are usually affected the most because government employees will get paid even though. It could be a delay in getting the payment, the salary. But then, on the other side, government contractors are not guaranteed any, payment. So they may be paid back, they may not. And when you look at the statistics, when you look at economics data, that during the government shutdown the contribution from that sector usually declines, usually see a negative contribution to GDP in the order of 0.3 or 0.1 percentage points.

It's not. Significant, but, it could be a temporary disruption there. But there are other implications. For example, as you mentioned the government could temporarily cease issuing building permits or mortgage closings could be delayed because. The government cannot confirm whether a property is in a flood zone or not, right?

So that could be an issue. Some very unexpected things could happen that could disrupt the usual business activity in many different sectors, like in housing or potentially even in some manufacturing. So I would say that again. Really depends on how long that lasts. If it lasts longer than the could, the implications could be larger.

Dana Peterson: So historically speaking, how have consumers thought about government shutdowns and does it really put a damper on their confidence that leads to a reduction in spending?

Yelena Shulyatyeva: Yes. That's a very good question, Dana, because if we look at our own consumer confidence indicators just if you look at the history of the data, that there is a significant impact to consumer confidence during the periods of government shutdown in the order of like almost 10 percentage points.

So if you look back, you will see that back in January of 2019, for example, the impact on consumer confidence was almost 10 percentage 10 index points. And that was also the case back in 2013 when consumer confidence fell by almost eight points. And back in 1996. As well.

So what's key here is that once the shutdown ends confidence rebounds, and if you look at the data more closely, you'll see that the most of the impact comes from the expectations component of the survey, not from present conditions. And as we know it is usually the present situation. That has the most profound impact on, for example, consumer spending and not necessarily what consumers think about the future.

But nonetheless, you could see that in the data, in the headline index. When a government shut down happens consumer confidence usually.

Dana Peterson: Thanks, Yelena. This has been super impressive and interesting to talk about. We're gonna take a short break and be right back with more of our conversation.

Welcome back to C-Suite Perspectives. Again. I'm Dana Peterson, center Leader of the Economy Strategy and Finance Center at the conference board. I'm also joined by Yelena Shulyatyeva, who is the senior US Economist for the Co The Economy, who is the senior US Economist for the Conference Board Economy Strategy and Finance Center.

So let's jump right back in. Yelena. When we have these shutdowns, you said that consumer confidence usually comes back. How much of a dent do you think a shutdown could make in GDP growth and do we get that back?

Yelena Shulyatyeva: Again, if if the shutdown is prolonged and we are talking about, several weeks, we could see an impact on GDP on headline GDP of roughly 0.3, 0.1 percentage points in the quarter of a shutdown.

But since these shutdowns don't really last more than a month. And a quarter is three months. If the shutdown is resolved within the quarter, then you know, the overall impact on GDP in the particular quarter would not be as large. It doesn't mean, particular consumer particular government worker doesn't feel the impact, the impacts for, certain groups of consumers and workers could be very significant. People could fall back on paying down their debt. They could just fall back on paying their mortgages even. And that could be quite significant for particular set of consumers. So that's why we may see. Significant impacts in sentiment and confidence measures of consumer optimism.

Dana Peterson: So some people say that there's some GDP that's lost for good. So for example, if consumers aren't going to their local newsstand next to their government job, those people are losing money and the consumption's not gonna happen again. I guess you could buy two sticks.

Two more sticks of gum. But when it comes to services, people aren't necessarily gonna go, for two haircuts and make up for what, what was lost. What would you say to someone who said something like that?

Yelena Shulyatyeva: I agree with that. So particularly if you talk about services, right? So as you said, Dana, you could probably go back and just buy two, I don't know. Two, something like two lamps. If you needed one lamp in, in one period and another one in the next, but yes, services could be lost. I don't think it's, the size of the impact is particularly big in that sense. If you forego certain types of services for a week, right?

And you could still do certain things later in the months, I don't think that we will really see that in economic data. When this data had released, so think about a mortgage closing, right? For example. So when the government shutdown happens, it could delay a mortgage closing. Think about a property in a flood zone.

Usually you need to get a confirmation that a property is in a flood zone, and for that you will get a particular certificate. It could still you could still obtain it or it may be delayed. So a mortgage closing, if it's delayed, it still happens. It's a part of services as well. So my argument is that, some services could be delayed.

Some services could be just gone forever and will not be replenished when the government reopens. I really don't think you will see a significant impact in consumer spending necessarily. I think the first sector, the most important sector where you would actually see a sizable impact would be government and specifically non-defense government sector.

Dana Peterson: So with all of this, what would be the impact on the labor market?

Yelena Shulyatyeva: Labor market implications are uneven. Once the federal government reopens federal workers who were furloughed or worked without pay during the shutdown will be made whole and they will most likely be receiving their payback.

The rest, some discussions about, permanently lame of people in this particular case that the shutdown that is looming right now. So if that happens and some people are laid off permanently, and when the government reopens. Will they be able to to go back to work? It's very uncertain.

I would argue that a lot of people will probably go back, but this definitely could raise a question about how many people will go back to work and, maybe some will not be able to rejoin. So I think that's a big question and it's a risk there. So you, there are roughly 3 million federal workers right now in the labor force.

But obviously not all would be placed on furlough or be affected. For example military will still operate and postal workers will still work. These shutdowns usually affect the federal workers that deemed non-essential, and they're not military, not postal workers.

So roughly 400,000 to 800,000 federal workers were directly affected in the past. For example, during the 2018 government shutdown about 850,000 workers for furloughed. So again, those non-essential workers will not work or. Some will work without pay and most will get their payback will most most will get paid back once the government reopens.

So some of these workers will be able to get jobless benefits, but they will have to pay them back once the government reopens as well. So there are a lot of complications. It's a lot of inconvenience, obviously, and really. Bad for those particular workers who work for the government.

But in the big scheme of things for the economy overall and for overall labor market, I don't think we'll see any sizable impacts again, providing that the shutdown doesn't last for a very long time.

Dana Peterson: There's one complicating factor this time. Typically, government workers who are non essential are furloughed, but currently the administration is actually talking about not necessarily furloughing people, which means they'd be brought back and paid their full salary, but actually laying people off.

And there's a risk that those people may not be brought back because it is. One of the priorities of the administration to shrink the government labor force. So that is also a complicating factor with what's going on this week. What, the final question here is, what about the Fed? How is the Fed going to think about this?

Is this something that they're just gonna take in stride like they usually do, or do you fear that this could be. A longer lasting impasse that might affect data and consequently the economy and how the Fed will choose its decision in October.

Yelena Shulyatyeva: The Fed will have to operate in the dark, in, in a case of a government shutdown but probably not in a full darkness.

So there's still some private sector data that will be released. So you can take a look at that and. Once the government reopens, the data will be coming back in. It may be delayed. The Fed is meeting at the end of the months. The FOMC meeting is scheduled for October 28th and 29th.

So with the decision to be released on the 29th of October, and if the government shutdown happens and lasts until then or. Even further then there's a big problem, I think because we will not be getting any economic data, and that would be very much complicating the Fed's job. So we are now at the crossroads and the Fed is facing a huge dilemma whether, they, the risks to the labor market or the risks to the inflation mandate is larger.

So how are you going to make policy based on the data that is not available? That's a really big question. So it's known, it's not only bad for those workers who will be affected in a case of a shutdown. It's not only bad for the economy and certain things that need to be done like, or certain business operations, but also for financial markets and the Fed in case of a government shutdown because.

It's really a lot at stake right now. And future monetary policy decisions that are affecting all consumers in the country. They have to be made in the dark or almost in the dark. And that's not a good thing to do.

Dana Peterson: The Fed can also hold off like in the past, I remember one time, maybe a decade or more ago where there was a government shutdown and they just didn't change any policy and they said we'll just need to wait until this passes.

But what if the administration does let go hundreds of thousands of government workers, meaning. Layoffs and they're not brought back. Would that shock to the payrolls and potentially even an upward shift in the unemployment rate, cause the Fed to go 50 instead of 25 in October.

Yelena Shulyatyeva: That's an interesting possibility.

I think maybe not in October if, especially if we will be talking about. Permanent layoffs, not just furloughs as you mentioned earlier. So in this case it could potentially move the unemployment rate higher, more even higher than we expect. So I think that again, it depends on how long it lasts.

The Fed could potentially wait. And see what happens in, in that upcoming meeting at the end of October. If we still experiencing issues with the data and the understanding the state of the economy by the December meeting, that would be a huge problem. But hopefully that will get resolved by that time.

Dana Peterson: Let's say there is a shutdown this week, that's not gonna impact the September payrolls data maybe in the revision. No, actually wouldn't even in the revision, 'cause it's October, but it would affect the October data if you do have permanent layoffs. But it would be, they wouldn't find out until after their October meeting.

I think, I agree with you. I think that the risks are more to the December meeting if we do have, hundreds of thousands of government workers being booted out and not coming back.

Yelena Shulyatyeva: But another risk here, Dana, is that if you wait for too long and the economy slows down, not necessarily because of the shutdown, but for other reasons, right?

Such as tariffs or things like that. You could be late in your response if you just wait, if you just have to wait till December. So that's why obtaining most up to date current date is so essential for everybody in the economy. It's very important for the Fed. It's very important for economists and analysts just to see where things are going and trying to assist.

What is happening to the economy in real time.

Dana Peterson: Excellent. That was a great conversation. Yelena. Thanks so much for being with me here today.

Yelena Shulyatyeva: It was my pleasure. Thank you, Dana.

Dana Peterson: Absolutely, and thanks to all of you for listening to the C-Suite Perspectives podcast. Again, I'm Dana Peterson, and this series has been brought to you by the conference board.